Will debit cards outstrip credit?

The next frontier

Regulatory headwinds haven't deterred the banks from ramping up their debit card businesses. Among the groups that offer the biggest potential for banks: people who earn more than $75,000 a year. According to MasterCard, they're the least active debit card users, usually turning instead to credit cards that offer frequent-flier miles and other rewards.

To attract that crowd, financial firms are ramping up their loyalty programs. MasterCard's Savings program, launched in October, offers debit users discounts on luxury brands such as Armani and 7 For All Mankind as well as at retailers such as Home Depot and Target. San Antonio's Frost Bank recently released its Momentum card, which is connected to customers' checking or savings accounts. The bank pays customers a higher interest rate on the accounts -- up to 3.5% -- when they make more debit purchases.

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There's also a land grab for the so-called underbanked, the roughly 80 million people who don't have bank or credit card accounts. Dallas' Comerica Bank won the right this year to issue debit cards to the estimated 4 million Social Security recipients who don't have bank accounts. The government deposits the money onto a prepaid card. (Comerica doesn't charge overdraft fees on them.) Visa and MasterCard offer prepaid debit cards that companies use to pay employees.

The aggressive push is paying off. These days, debit cards are as widespread as credit cards. At the upscale suburban Atlanta restaurant Aqua Blue, waitresses now bring diners a device that lets them swipe their debit card and enter their password to pay for meals.

"Debit is becoming the payment card of choice for the American public," says Red Gillen of consulting company Celent.

But for consumers like Garcia who want to break free from the high fees and penalties of credit cards, debit cards may not be the panacea they expected. Says consumer advocate Fox: "As with credit cards, consumers can't keep up with what the rules are."

This article was reported and written by Christopher Palmeri and Brian Burnsed for BusinessWeek.

Published Dec. 2, 2008

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